ⓘ Marginal efficiency of capital. The marginal efficiency of capital is that rate of discount which would equate the price of a fixed capital asset with its prese ..


ⓘ Marginal efficiency of capital

The marginal efficiency of capital is that rate of discount which would equate the price of a fixed capital asset with its present discounted value of expected income.

The term" marginal efficiency of capital” was introduced by John Maynard Keynes in his General Theory, and defined as" the rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price”.

The MEC is the net rate of return that is expected from the purchase of additional capital. It is calculated as the profit that a firm is expected to earn considering the cost of inputs and the depreciation of capital. It is influenced by expectations about future input costs and demand. The MEC and capital outlays are the elements that a firm takes into account when deciding about an investment project.

The MEC needs to be higher than the rate of interest, r, for investment to take place. This is because the present value PV of future returns to capital needs to be higher than the cost of capital, C k. These variables can be expressed as follows:

  • C k = ∑ i = 1 n R i 1 + M E C i, {\displaystyle C_{k}=\sum _{i=1}^{n}{\frac {R_{i}}{1+MEC^{i}}},} where C k is the upfront capital outlays; this equation defines the MEC.
  • P V = ∑ i = 1 n R i 1 + r i, {\displaystyle PV=\sum _{i=1}^{n}{\frac {R_{i}}{1+r^{i}}},} where n is the number of years during which the capital will be productive, and R i is the net return in year i ;

Hence, for investment to take place, it is necessary that PV > C k ; that is, MEC > r. As a consequence, an inverse relationship between the rate of interest and investment is found i.e.: a higher rate of interest generates less investment.

With the European Commission according to its data bank "AMECO" Annual Macro-Economic Data the marginal efficiency of capital is defined as "Change in GDP at constant market prices of year T per unit of gross fixed capital formation at constant prices of year T-.5.

  • productivity of capital or the marginal efficiency of capital The ICOR can be thought of as a measure of the inefficiency with which capital is used. In
  • the marginal product of capital. Marginal product of labor Production theory basics Marginal efficiency of capital Nicholson, Walter 1978 Microeconomic
  • marginal cost is incremented by one unit that is, it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production
  • employ marginal abatement cost curves to guide their decisions about long - term capital investment strategies to select among a variety of efficiency and
  • the marginal utility of a goods or service is the change in the utility from an increase in the consumption of that good or service. In the context of cardinal
  • The marginal efficiency of capital is defined as the annual revenue which will be yielded by an extra increment of capital as a proportion of its cost
  • the marginal efficiency of capital curve to the right and increases the curve s slope, an increase in wage will increase the demand for health capital The
  • allocative efficiency economies of scale, opportunity cost or marginal rate of transformation productive efficiency and scarcity of resources the
  • Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual
  • perfectly competitive markets, productive efficiency occurs at the base of the average total cost curve - i.e. where marginal cost equals average total cost - for
  • if we can go from the marginal product of capital to the profit rate, we should be able to go from the profit rate to the marginal product. In any event
  • Rail code Merseyside, England Marginal efficiency of capital an economics theory Measured environmental concentration of a substance in an environmental